Skip to main content

Leaving money on the table to make a profit

Bob Rietveld

Price represents the ultimate trade-off between the value of the product and what a customer must sacrifice in exchange. Price is one of the few levers a company can adjust with relative ease. Setting the “right” price is critical. Right for most businesses means optimized for profit. Set your price too high, and you risk losing customers. Set your price too low, and you are leaving money on the table. And no one likes to leave money on the table, right?

Wrong, says Jason Fried, founder of 37signals, makers of project management software. “We are OK with leaving money on the table,” he stated in various podcasts. 37signals recently reintroduced Campfire, a bare-bones chat tool, similar to Slack. Priced at a flat $299. No monthly fees, no subscriptions. Why $299? Because “ felt like the right price point”. No AB-test, no pricing elasticity study. One discussion with fellow cofounder and the price was set. 37signals is leaving money on the table. Campfire price point is 99.99% cheaper than competitors like Slack. 37signals is no philanthropic institution. The profit motive is a central to their business philosophy, but apparently profit maximization is not.

Contrast this with a recent HBR article, which reports the results running 1,000 pricing A/B tests on 300 eCommerce retailers. 54% of the tests found a lower price point which would increase overall profits. For the majority of the retailers the sweet spot was downmarket. Money is left on the table, so prices need to drop. Adam Smith in optima forma.

Two radically different approaches. And the rationality seems to lie with data. But consider some of the implications of leaving money on the table:

Pricing side effects
The pricing experiments reveal HOW MUCH is left on the table. Dropping prices becomes a no-brainer, it becomes the only logical course of action. But is it? Price decreases may have all kind of potential side-effects. Price changes usually only go one way, down. It tends to be a one way door. Competitive responses could start a race to the bottom. Changing price frequently may off put customer purchases, as customers postpone purchases until the next price drop. Pricing has signalling function on product quality, decreases may harm your desired positioning. So short term profit maximization may hurt long term profitability.

Price is a key part of the business model - e.g structure of the value exchange. Price (per month, user, product use etc.) determines how and when money flows into the company. Basecamp (main product from 37signals) has a max price of 300 dollar per month for their enterprise plan. Fortune 500 or Fortune 5 million, they all pay maximum of 300 dollar. Every customer on their max plan is therefore equally important in terms of revenue. Easily, 37signals could charge enterprise customers 10 fold and increase profits. What is the effect of this price policy? The 80%- 20% rule does not exist. Big or small every customer is essentially equally important( see here for more on 37signals take on pricing Basecamp).

Now consider Slack. Slack ’s customer base is the opposite. Top 1% of the customers make 50% of the revenue [read this excellent case from Theta on the unit economics of Slack]. Loosing a top 1% customer would have a major impact. Slack’s growth potential is limited by the nr of “whales” they can acquire. Revenue concentration like this allocates power to big customers. Try comparing a client requesting a feature at 37signals or Slack. Who has more freedom to stay the course? Leaving money on the table in this case means independence.

Disagreement on customer value
Customers not willing to pay a price means, they are making a different trade off. Sometimes that is fine. You can’t serve everyone. Understanding how the value trade-off is made and how this is differs between customers is critical. 37signals is speaking to customers about Campfire, trying to understand how customers use it, which use cases provide value and ultimately understanding the value trade off customers are making. These insights will not emerge from a pricing AB test alone. Before profit maximization should come customer understanding.

While changing pricing strategies may be necessary, it is vital to consider the broader implications and trade-offs involved. Leaving money on the table in the short run may pave the way for long-term profit.